By some estimates, more than half of US health care spending is for patients with chronic conditions. As I have previously reported, this money is spent very wastefully. Care is often delivered in discrete, disjointed and disconnected ways. The most efficient form of therapy (drugs) is substantially underutilized. And many chronic patients are not receiving care at all.

Fundamentally, there are two ways to deal with chronic care. The current approach is a nonmarket approach, and it has the following 10 characteristics:

Completely suppressing the market for every facet of medical care and every type of health insurance — so that no one ever faces a real price for anything;

forcing health plans to take enrollees they don’t want at premiums well below the cost of their care;

forcing doctors to treat patients with complicated conditions for the same fees as easy-to-diagnose-and-treat patients;

paying doctors in a way that encourages uncoordinated and unintegrated care;

denying providers the opportunity to repackage and reprice their services in ways that would lower cost and raise quality;

not holding any hearings or organizing any briefings or conferences on how government’s suppression of the market is the real cause of our misery;

advocating health reforms that will make all of these problems even worse than they already are;

refusing to allow the term “economic incentives” to even be mentioned in the speeches, hearings, briefings, conferences and seminars or to appear in the papers, editorials, journal articles, proceedings, books and other writings; and

believing that the Commonwealth Fund has discovered a solution to all of the above.

[Just describing the current situation is so depressing some of you may want to pause and compose yourself before reading on — P.S. If it makes you feel any better, in other countries the situation is even worse.]

Fortunately, there is a better way. Under a market-based approach, providers find it in their self-interest to solve other people’s problems. The more problems they solve and the more thoroughly they solve them, the more take-home pay they realize. Without in any way discouraging altruism, a market-based approach harnesses the pursuit of financial self interest in the course of lower-cost, higher-quality, more accessible care.

[You are already familiar with this approach. You enjoy its benefits in the market for just about every good or service you consume — with public schools, the Department of Motor Vehicles and our health care system being highly visible and unfortunate exceptions.]

Chronic Care Entrepreneurship in Dallas. An example of a market-based approach to chronic care is American Physician Housecalls (APH), an entrepreneurial, for-profit enterprise in Dallas. APH has found a way to make money by meeting the needs of chronic Medicare patients with multiple health problems. It does so by treating patients in their own homes and assisted-living communities. Because different specialists who call on the patient need to know what other specialists are doing, an electronic medical record is essential to the APH business plan. Electronic prescribing is a natural concomitant.

Since patients don’t have to accept APH services, the enterprise makes money only by satisfying them and meeting their needs. Since APH only provides outpatient care, they profit only so long as they keep their patients out of the hospital. If they make a mistake and a patient has to be admitted for treatment, APH loses a customer and loses Medicare revenue.

APH is a living, breathing example of for-profit medicine solving the problems of chronic care. But its existence has nothing to do with the Centers for Medicare and Medicaid Services (CMS). To the contrary. CMS (with help from Congress) tries to fully suppress any and all attempts to creatively and innovatively solve the problems of chronic care through the marketplace. APH managed to find a space to do good (for themselves and for Medicare patients) that CMS (probably by accident) left available to them.

[Note: Most of what follows is posted at the Health Affairs blog:]

Health Savings Accounts and Chronic Care. For a long time, I have believed the greatest potential for Health Savings Accounts (HSAs) is in the treatment of chronic illness. I even wrote some fictional vignettes in a “vision” chapter in the National Center for Policy Analysis’ Handbook On State Health Care Reform, describing how HSAs might work for diabetics and other patients. This was an application of a more general piece on “Designing Ideal Health Insurance” that many of you might be familiar with.

Turns out, truth is stranger than fiction. UnitedHealthcare is now using HSAs and Health Reimbursement Arrangements (HRAs) to do something that almost never happens: aligning health incentives with economic incentives.

For diabetics, the program works like this. Deductibles and copayments are reduced to zero for four classes of medications, certain supplies and some office visits. Patients are further prodded by an online tracking and reminder system. And this is just the beginning. Patients who comply with their treatment regimes are rewarded with an additional contribution to their health account of up to $1,000 a year.

Here is my take:

Patients get an economic reward for doing things that have an economic payoff for the insurance pool as a whole. Let’s say the insurer/employer expects to save $500 in medical costs if a diabetic patient is fully compliant. Then it makes sense to pay up to $500 to induce such compliance.

The mirror image of a reward is a penalty. Since failure to be compliant means the patient forgoes the $500 reward, $500 is the opportunity cost of noncompliance.

One way to think about this arrangement is to see that there is a social cost of noncompliance over and above the personal costs. The social cost is the cost that is imposed on others. In making choices, therefore, patients are encouraged to consider the total cost of their actions, not just the personal costs.

There are other decisions patients make that do not have large spillover effects for the insurance pool as a whole. For these decisions, it makes sense to have the patient manage his/her own health care dollars. In doing so, patients will tend to weigh personal cost against personal benefits. That is appropriate.

No employee is forced to participate in the program. However, there are two kinds of rewards for doing so (and implied penalties for not doing so): (a) a flat fee of as much as $500 for answering a health questionnaire and for undergoing screening tests, and (b) the prospect of zero out-of-pocket expense for some drugs, supplies and office visits. Presumably, these rewards reflect the value to the insurance pool as a whole to induce screening and enrollment.

Two general comments on the program:

The incentives here are not as finely aligned as I imagine they could be. Among other things, every diabetic gets the same financial deal, even though expected costs must surely vary a lot from patient to patient. Still, you have to give UnitedHealth credit for a major advance in getting the economics of health care right.

Because of the rigidities of the HSA law, employees can have a zero deductible for some drugs but not others. Statins and beta blockers are okay (because they are considered “preventive” drugs), but insulin and antiglycemics are not okay (because they are considered “maintenance” drugs). This is one more reason to change the law and give the private sector a completely flexible account.

A news story description of how this program works for Affinia and other companies is here.

Comments (20)

If the Administration were serious about the lessons of behavioral economics (as expressed in Obama advisor Cass Sunstein’s book “Nudge”, not all of which we have to accept to appreciate that incentives matter), they would remove the barriers the government has erected to these innovations.

We discussed this before in this blog, with respect to Safeway’s voluntary benefits program, and Professor Scott E. Harrington of UPenn’s Wharton Business School has a good op-ed on this topic in today’s Wall Street Joural(http://tinyurl.com/ny562h).

Wellness programs are designed to influence employee behavior by aligning workers’ incentives more closely with those of their health plan. To an economist this makes sense: maintain healthy habits and get a discount. However, the Dept. of Labor recently announced it would not tolerate some of the programs that charged healthy workers less than unhealthy ones. These types of programs have the potential to prevent (or delay) chronic illness in some people.

John, the reward and incentive programs offer tremendous opportunities for next generation HSA eligible plans that are NOT high deductible. They may legally have the unfortunate misnomer of HDHP but the net deductible can be zero. Unfortunately, most states have rebate laws that prevent insurers from offerring such products to fully insured small group and individual policies. We eliminated those laws in Georgia last year. I recommend other states do the same. Government is not the solution they are the problem in many ways.

Unfortunately, we know that the present federal administration does not want financial incentives, butinstead it wants to hold the power of the dollar, as that is really the only power they hold.
We need to continue to educate the public about this continuing power grab.

“You are already familiar with this approach. You enjoy its benefits in the market for just about every good or service you consume — with public schools, the Department of Motor Vehicles and our health care system being highly visible and unfortunate exceptions.”

Devon:
Do you think the wellness test would be applicable to a plan in which premiums are not assessed according to risk, but according to ability to pay?
The benefits would vary in direct contributions to premiums paid, less claims made. This “formula” would help to alleviate concerns that the plan premiums are based on health status.

Ron:
One potential way around the HSA/HDHP limitations is to structure a plan around a separate savings account and corresponding insurance plan.
As I understand it, the Roth IRA will be available to all income levels next year. A separate portion of that could serve as the savings vehicle.
The insurance portion could be designed as I briefly explained in my comment to Devon.
Don Levit

A Mobile Medicine Platform such as American Physician Housecalls is a very clear solution to the most expensive patients that Medicare and Medicaid serve. We can’t fix everything at once; why not start with one of the most expensive (and fastest growing) populations first?

APH is a great idea.however some drastic actions need to be taken.END OF LIFE CARE needs to be addressed at once and first if we are serious about cost containment.mds need to seriously educate and induce patients and families to consider advance directives and hospice care.{let us not talk about death panels}.multiple consultations,trying to salvage patients who have no hope of not only survival but also quality of life,escalate health care costs astronomically. nursing home patients who have end stage illnesses, and those patients who keep making repeated visits to ed should be encouraged to sign advance directives.eds should have holding areas where patients can be stabilized and observed for few hours and then returned to extended care facilities. too many cts[brain,lung,etc} are ordered by edmds.internists who care for patients in nursing homes avoiding unnecessary patient trips to eds and hospitalizations should compensated by medicare medicaid, and insurers,Adequately.too many unnecessary tests are being ordered,consultations done,inpatients followed in hospital when no more needed,for various reasons by my peers {cardiologist myself}, and they should act more responsibly in the present health care status.OF COURSE ULTIMATELY TORT REFORM IS THE MOST BASIC SOLUTION TO THE PROBLEM.in addition the current practices of the insurance companies,hospitals, and the drug companies as well as the administration of CMS and its coding system need a thorough overhaul and reform. also the medical Academics,for a change, should be more aware of the intricacies of care of patients by their physicians in the trenches. by the way i am a card carrying republican. please give some thought to my suggestions. thanks.

John, Thank you for your initiative in sensible Healthcare reform. Government is not interested in sensible healthcare reform but greater control over people and with that, control over the trillions of dollars in healthcare. Place this back into a free market economy with a structure as you have so eloquently outlined, I believe the results would lead to greater efficiency, lower costs, improved patient satisfaction – and I pray to God (if I can still do that)- less government involvement!!

[…] Allow Special Health Savings Accounts for the Chronically Ill. One of the most successful Medicaid pilot programs is Cash and Counseling, under which the homebound and disabled manage their own budget and are free to hire and fire those who provide them with services. We should use this experience as a model to liberate the chronically ill and empower them in a newly-competitive medical marketplace. (See details in a previous Health Alert on chronic illness and Health Savings Accounts.) […]

Hi…I have Crohns and have been dealing with it for almost 3 yrs.
I do not have Health Ins., nor prescription coverage.
The Rx coverage I did have, expired.
I applied for Medicaid and they denied me.
I have recently applied for Medicare, but have no idea how long that will take.
Medicare sent me notice that when it starts that they will be taking out almost $120.00 from my disability to cover the cost.
I only get $986. a month and rent($525), utilities, groceries, staples, ect, all comes out after rent.
It doesn’t leave me much.
Oh. they also took away my food stamps, 3 months ago..not the way I wanted to lose weight, but it worked.
Anyway, my question is: Could you give me any ideas whom I could contact for help with my disease and meds?
Any help you can provide, is greatly appreciated.
Thank You & God Bless